Inflation pressures weigh on US and UK firms; Eurozone economy ‘booming’ – as it happened

Time to wrap up - here are today’s main stories:

Goodnight. GW

Back in Europe, stock markets have closed in the red.

Germany’s DAX (-1.1%), Spain’s IBEX (-1.1%), Italy’s FTSE MIB (-0.95%) and France’s CAC (-0.9%) all finished lower.

Pernod Ricard (+2%) bucked the trend, though, with shares hitting record highs today after the firm behind Jameson, Mumm champagne, Absolut vodka and Martell cognac lifted its annual profit forecast.

The French drinks firm said the pace of recovery is proving stronger than anticipated. as Covid-19 restrictions were lifted.

US new home sales have dropped to a one-year low.

Purchases of new single-family homes fell 5.9% in May, to an annualised rate of 769,000. April’s figures were revised lower too, to 817,000, showing a steeper monthly fall.

Economist had expected a small rise in May, so this is quite a substantial miss.

The report also showed that median house prices hit a new record.

The fall in sales suggests that the sharp rise in prices in recent months, and the low number of properties available, are weighing on the market.

The surge in raw materials earlier this year, notably lumber, has pushed up construction costs and encouraged some builders to put projects on hold [lumber prices have since dropped back].

Demand for homes also surged after the Covid-19 lockdown led to more home working, and home-schooling, with people looking for larger homes, perhaps further from their place of work.

That impact could now be fading, through, as vaccinations lead to a return to more normal patterns.

Bloomberg says:

Shipping bottlenecks and higher input prices have held back homebuilding, contributing to skyrocketing prices for the limited supply of homes available. A silver lining of the report was data showing new-housing inventory continued to increase, though about a third of those homes have yet to be built.

Ian Shepherdson at Pantheon Macroeconomics said the sales drop might be a sign that demand in the suburbs has fallen as Covid-19 fears have faded, going so far as calling the end of the boom. By contrast, Stephen Stanley at Amherst Pierpont Securities calls it “mostly an anomaly.”

Today’s US PMI report highlights the problems that firms are experiencing hiring staff, says Jai Malhi, Global Market Strategist at J.P. Morgan Asset Management,

“Today’s US PMIs may have calmed but they continue to point toward a speedy rebound in growth, which has taken place since the vaccine rollout kicked into top gear. PMI levels well above 65 were unlikely to last but today’s prints show that the economy may not be at top speed, but is at least progressing nicely.

“The key concern for investors has been around inflation and the survey details highlighted ongoing concerns over supply constraints, which have pushed input prices to near record levels. The fall in the employment component of the surveys is shining a light on the continued difficulty in hiring for businesses as they aim to rebuild their workforces, even though some states have ended enhanced unemployment benefits early. If these supply constraints prove to be temporary then perhaps the slight moderation in the PMIs is good news for investors who may have been worrying about the economy overheating and leading to even higher levels of inflation.

“With the economy appearing more likely to be able to stand on its own two feet, the Fed has begun to plant the seed that policy support will be slowly reduced. The still high level of today’s surveys will provide some confirmation for the Fed that the time to begin taking its foot off the accelerator is not far away.”

Last week, Fed chair Jerome Powell suggested several factors were holding back hiring, including a skills mismatch between people who lost their jobs in the pandemic and the vacancies now on offer; concerns about Covid (especially in customer-facing roles) and childcare responsibilities.

Powell also predicted hiring would pick up as unemployment benefits expire this autumn (such as the $300/week supplement that has ended in some states already).

The rollicking growth across the US private sector has slowed a little, as manufacturers battle with lengthening supply delays and firms struggle to hire staff.

Growth slowed at both service sector firms and manufacturers this month (but remained a healthy pace), as input costs remain very high, and supply chains creak under high demand.

That’s according to IHS Markit’s flash US composite PMI index, which measures activity in the private sector, and which has dropped to 63.9 from May’s 68.7.

That level still shows substantial growth, although it also suggests a slight cooling after surging this year [50 points shows stagnation].

View image in fullscreen

The survey of purchasing managers found that activity growth moderated at both manufacturing and service sectors, with goods producers hampered by significant supplier delays and both sectors reporting difficulties finding qualified workers.

The manufacturing PMI hit a record high, though this was partly due to the recent surge in prices of raw materials and other costs, with average supplier delivery times hitting a record “by some margin”.

Markit reports that new US business growth remained marked during June, although it did drop to a three-month low.

And price pressures are also racing along - input price inflation softened slightly but was still the second-fastest on record.

Manufacturers continued to note rapid increases in raw material and fuel costs, whilst service providers highlighted higher wage bills to attract workers plus greater transportation fees and fuel costs.

And (as in the UK earlier) firms are passing these costs onto customers

Higher costs were commonly passed on to clients through a steep rise in output charges during June. The increase in selling prices was the second sharpest since data collection began in October 2009.

Companies also say they’re struggling to hire suitably trained candidates for current vacancies [suggesting a skills mismatch between the many vacancies on offer, and the people looking for work].

The solution, though, could be to raise wages.... and there are signs in the PMI survey that this is happening.

Markit says:

Service providers stated that wage costs and additional transportation fees pushed up cost burdens, which rose at the second-fastest pace on record.

Although the rate of job creation remained strong overall, backlogs of work grew this month, at one of the fastest rates seen in the last decade.

Chris Williamson, chief business economist at IHS Markit, explains what’s going on:

“The early PMI indicators point to further impressive growth of the US economy in June, rounding off an unprecedented growth spurt over the second quarter as a whole.

“While both output growth and inflows of new orders have come off their peaks in both manufacturing and services, this is as much due to capacity constraints limiting firms’ abilities to cope with demand rather than any cooling of the economy.

“Although price gauges have also slipped from May’s all-time highs, it’s clear that the economy continues to run very hot. Prices charged for goods and services are still rising very sharply, record supply shortages are getting worse rather than better, firms are fighting to fill vacancies and manufacturers’ warehouse stocks are being depleted at a worrying rate as firms struggle to meet demand.

“While the second quarter will likely represent a peaking in the pace of economic growth, a concomitant peaking of inflation is far less assured.”

The technology-focused Nasdaq has hit a fresh record high at the start of trading in New York, as investors continue to drive up shares in tech stocks.

The Nasdaq Composite has opened 0.3% higher at 14,296, up 43 points.

Microsoft opened a little higher, currently up 0.1% at $265.80, after yesterday hitting a $2trn valuation for the first time ever.

That made Microsoft just the second publicly traded American company, after Apple, to achieve this huge valuation.

As CNN explains:

Microsoft’s market capitalization topped $2 trillion during trading on Tuesday, and closed just $300 million shy of that mark. Its stock on Tuesday climbed 1.1% to $265.51.

The company reached the $2 trillion milestone just over two years after it first passed the $1 trillion market cap mark.

Covid-19 helped get it there. The pandemic meant people were spending more time on their devices, boosting demand for Microsoft’s computers, gaming systems and cloud computing platform. And a stock market rally — along with the success of tech companies in particular — lifted its shares.

The US current account deficit has hit a 14-year high, as America’s economy pulled in more imported goods as its recovery gathered speed.

The current account deficit widened by $20.7bn, or 11.8%, to $195.7bn in the first quarter of 2021, up from $175.1bn in the fourth quarter of 2020.

That was the largest shortfall in the current account since the first quarter of 2007.

It lifts the deficit to 3.6% of GDP, up from 3.3% in Q4, the Bureau of Economic Analysis reports.

America’s widening trade gap was partly responsible, with imports growing faster than exports as the US economy rebounded strongly from the pandemic.

While goods exports rose by $24.5bn, to $408.6bn, this was outpaced by a $39.9bn jump in goods imports, to $677bn.

The BEA says:

The increases in both [goods] exports and imports reflected increases in nearly all major categories, led by industrial supplies and materials, primarily petroleum and products, that were partly offset by a decrease in automotive vehicles, parts, and engines.

Imports of services increased $1.8bn to $120.2bn, mostly due to a rise in sea freight transport. Exports of services increased $1.1bn to $175.9bn, led by personal travel.

Thousands of leaseholders will be refunded unfair ground rents and allowed to buy the freehold of their property at a discounted price after a crackdown on property developers by the competition watchdog.

Persimmon Homes and Aviva have agreed to offer the refunds after the Competition and Markets Authority (CMA) uncovered “troubling evidence” that leasehold homeowners and prospective buyers were overcharged and misled by the UK’s biggest housebuilders.

Campaigners described the new commitments as “life-changing” and a “massive milestone” in the battle to secure a fair deal for property buyers, and called for other developers and freeholders to follow suit.

Aviva, an insurance group that bought freeholds from developers, has agreed to remove ground rent terms that are considered unfair and repay homeowners whose rents doubled.

Persimmon has agreed to offer leasehold homeowners the opportunity to buy the freehold of their property at a discounted price, and will make repayments to some homeowners who have bought their freeholds.

Here’s the full story:

In the US, there was a jump in demand to refinance home loans last week, suggesting houseowners may be anticipating the end of super-low interest rates.

Applications to refinance a home loan rose 3% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index, while applications for mortgage to purchase a home were only up 1%.

That was despite a rise in mortgage rates (which usually dampens demand), suggesting that people might be trying to lock in low borrowing costs, as the Federal Reserve weighs up the inflation risks as the economy recovers.

Currently the Fed is buying $40bn of mortgage-backed securities each month, through its $120bn QE programme, which has kept mortgage rates low.

Joel Kan, MBA’s associate vice president of economic and industry forecasting, said refinances increased for the second consecutive week despite a rise in rates.

“Mortgage rates increased last week, with the 30-year fixed rate rising to 3.18 percent - the highest level in a month.

Figures yesterday showed that existing US home sales in May fell for the fourth straight month, as the surge in prices put houses out of reach for many buyers.

View image in fullscreen

Representatives from the UK travel industry, including airline cabin crew and pilots, are holding a day of action to urge ministers to reopen the sector and give more financial support to businesses.

They are calling on the UK Government to support a safe return to international travel in time for the peak summer period, by expanding the green list, and remove testing and quarantine requirements for fully vaccinated travellers returning from green and amber locations.

They are also pushing for a package of tailored financial support, including extension of furlough support until April 2022, to help the travel sector and protect jobs.

Events are being held in Westminster, Holyrood in Edinburgh, and in Belfast.

View image in fullscreen

Tim Alderslade, chief executive of Airlines UK - a trade body representing UK carriers, says:

“It is now or never for the government to reopen travel and save what is remaining of the summer season, not just for families desperate to get away but the tens of thousands of jobs which rely upon this once thriving sector.

“Airlines are at the absolute limit of what they can borrow and without a genuine reopening this summer they will require government support to survive.”

Brian Strutton, acting general secretary of pilots union Balpa, said the government must decide if it will “make or break the UK travel industry” this summer.

Sky News have more details:

Media minister John Whittingdale said he hoped the government would be able to put more countries on the green list of travel restrictions later this week.

Mr Whittingdale told Sky News the list would be reviewed “later this week to make revisions to the green list, and I hope that we can put more countries on to it”.

But he urged people to go on holiday in Britain.

“You can have a great holiday in Britain and I think a very large number of people will decide this year that that’s what they will do,” he said.

More here: COVID-19: Travel industry holding day of action as it calls for sector to be reopened to save summer

View image in fullscreen

Unions have criticised Lloyds Banking Group as it announces the closure of 44 more branches across England and Wales this year.

The Unite union says the move is a “bitter blow for customers, staff and local communities”, at a time when people need support from the financial services sector more than ever.

Unite national officer, Caren Evans, said:

“The decision by Lloyds Banking Group (LBG) to further erode its presence within our communities is baffling. The closure of 44 more bank branches will deny our communities of essential services such as access to cash and experienced highly trained staff. A local ATM is not a suitable alternative to a staffed bank branch.

In recent times LBG has spent significant resource to sell its message of ‘Helping Britain Recover’. Unite seriously question how this decision to walk away from local communities promotes this message at a time when the customers will rely on the financial services sector support more than ever.

According to Unite, 166 full-time equivalent staff will be affected by the decision to close 29 Lloyds Bank and 15 Halifax branches in 2021. Unite says that Lloyds has given the union a commitment that most staff affected will be redeployed, with some voluntary redundancies.

It takes the total number of Lloyds closures this year to 100.

Lloyds says that it is seeing “significantly” fewer transactions at these locations, at a time when many customers are moving to electronic banking instead.

Vim Maru, retail director for Lloyds Banking Group, said Lloyds digital banking customers had grown by over four million in five years, to almost 18 million, including 13.6m active app users.

“This means that, like many businesses on the high street, we must change for a future where branches will be used in a different way, and visited less often.

“We’ll continue to invest in our high street presence, as this week we’re opening a new concept Bank of Scotland branch in Edinburgh, the only bank to take up residence in the new St James Quarter.

The Evening Standard have a list of the branches being closed.

The surge in hiring at UK firms this month is a very encouraging signal, says Dean Turner, Economist at UBS Global Wealth Management:

“Although down from their recent peaks, today’s PMI figures signal that the recovery in the economy charges ahead.

There were some particularly encouraging signals for hiring, although evidence of price pressures and supply constraints continue to feature in the surveys. Encouragingly, the economy continues to respond positively to the easing of restrictions. The recent delay to the final stage of lifting restrictions shouldn’t hamper the recovery in a meaningful way.

The dip in the UK composite PMI this month (to 61.7, from 62.9) suggests the pace of economic recovery may be peaking, says Kieran Tompkins of Capital Economics.

If so, the UK’s monthly GDP growth rates may slow after hitting 2.3% in April.

Inflation pressures do not seem to have peaked, though, he points out, with firms facing rising input costs, supply chain problems, and pressure to raise wages to attract staff.

Tompkins explains:

• There is little sign in the manufacturing sector of supply issues and pipeline price pressures abating soon. Suppliers’ delivery times lengthened by the second greatest extent on record and input prices set a fresh record high for the second consecutive month. What’s more, output prices rose from 68.3 to 73.2, which on past form is consistent with core producer output price inflation rising from 2.6% in May to around 6.5%. That would suggest core goods CPI inflation could rise to 5.0% in the coming months, which is enough to add 1.0 percentage point (ppt) to May’s overall CPI inflation of 2.1%.
  
  
• The fall in the services PMI from 62.9 to 61.7 was a surprise given that the survey captured a full month of indoor hospitality reopening. But the lofty level suggests that the sector is still growing healthily. There were some worrying signs, though, of recruitment difficulties. At face value, the rise in the services employment balance from 56.7 to 58.7, which suggests growth in services employment could rise from -2.7% y/y in Q1 to +2.0% y/y, indicates that hiring is strong. But combined with the increase in input costs to 71.6, just shy of a record high, this suggests that there could be a rise in wage pressures.

Here’s the note:

IHS Markit’s Chris Williamson also warns that the surge in UK growth may have peaked (as the composite PMI dipped to 61.7 this month, from May’s 62.9, showing slightly slower growth).

Williamson adds that inflation could rise further over the Bank of England’s 2% target (it hit 2.1% in May), because firms are seeing input costs, and their own output prices, rising at unprecedented rates.

“Businesses are reporting an ongoing surge in demand in June as the economy reopens, led by the hospitality sector, meaning the second quarter looks to have seen economic growth rebound very sharply from the first quarter’s decline.

There are some signs that the rate of expansion appears to have peaked, as both output and new order growth cooled slightly from May’s record performances, but full order books and a further loosening of virus-fighting restrictions should nevertheless help ensure growth remains strong as we head through the summer.

However, inflation worries have continued to intensify. Record levels of the survey’s price gauges and the further development of capacity constraints hint strongly that consumer price inflation has much further to rise after already breaching the Bank of England’s 2% target in May.